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Trading Indices

Trading Indices - Basics

Since indices like the DAX and Dow Jones are headlines in the financial world on a daily basis, what is an index and how can traders benefit from adding them to their trading? Let's start with the basics. The index, also known as the stock market index, is a measure of the aggregate of companies and is used to measure the performance of a sector, region, or economy of a country.

The first index was created by the Wall Street Journal editor and Dow Jones & Company co-founder Charles Doe in 1885. Before the digital era, the price of an index was calculated using simple averages, that is, the sum of the prices of the components. companies and dividing it by the number of companies. This may seem like an oversimplification these days, but it really served the purpose of providing a reliable figure to measure the strength of the US economy.

Market value vs. price?

Indices today use different formulas to determine their price, which can be divided into two main categories, which is a key point for traders to understand before evaluating the performance of an index.

1. Market Value Weighted Indices

Market indices are calculated based on the total market value of its member companies. This means that the larger the company, the more influence it has on the index. This is the most common methodology used by indexes, with the FTSE and DAX being classic examples.

2. Price Weighted Indices

This type of index is calculated based on the stock price of its companies. In this case, the companies with the higher share price have a greater influence on the overall index than the companies with the lower price.

Major indices

UK100

This list includes some of the largest companies subject to UK company law, so it is important to note that not all UK100 companies are based in the UK. The index is calculated in real time and prices are published per second during market hours. Sectorically, it focuses on energy, financial services, mining, pharmaceuticals and oil and gas.

GER30

Also known as the DAX stock index, it includes the top 30 German companies by market capitalization. The DAX is one of the most traded indices worldwide due to consistently higher volatility and higher daily ranges than other indices.

SPX500

The SPX500, also known as the S&P 500, is without doubt the most widely known index in the world. It was created by the publishing firm Standard & Poor's and includes 500 of the leading American companies. Due to its strong correlation with other markets, the S & P500 is popular with traders.

US 30

The US 30 or better known as the Dow is the most recognizable stock index in the world, tracking the stocks of 30 companies in nine major market sectors. A unique feature of this index is that it is a weighted average of price and its movements are used as an indicator to gauge risk sentiment around the world.

NASDAQ

NASDAQ is an American index best known as the high tech sector. Although it includes a number of other sectors, names such as Apple, Facebook and Google lead its constituents.

JPN225

Also known as the Nikkei 225, it is the most popular index on the Tokyo Stock Exchange and a key indicator of the Japanese economy's performance. Given that Japan's economy is export-oriented, it should come as no surprise that Nikkei225 is highly correlated with US stock markets.

AUS200

AUS200, better known as ASX200, is a stock market index that includes the 200 largest companies in Australia. It is a capitalization-weighted index, which means that the company's contribution to the index is based on its total market value.

FRA40

FRA 40, also known as CAC, is the benchmark index for the French stock market. Given that France is one of the largest economies in Europe, it is widely used to assess the health of Europe as a whole. Some of the more famous ingredients include L'Oreal, AXA and Michelin.

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ESTX50

ESTX50, or Euro Stoxx 50, is made up of the top 50 companies in Europe and is often referred to as the European Dow Jones. It is a market-weighted index that is revised annually in September.